It's only January, and one month's data does not a trend make. Still, yesterday's dismal Retail Sales report for December, coupled with today's weak Producer Price Index (PPI) report will certainly give the Fed pause as it considers when and how much to raise interest rates.
Yesterday morning's Retail Sales report for December showed a dramatic decline of 0.9%, the weakest number since January 2013. While that sharp a decline may be an aberration, it's difficult to dismiss amidst all the other foreboding signs that the economy may not be as robust as first thought. Coming at a time when gas prices have been falling dramatically, though, it is certainly cause for concern, especially if we don't see a decent rebound next month.
The Producer Price Index (PPI) reported today, showed similar weakness, declining another 0.3%. This index has now fallen for four consecutive months, with December's decline being the steepest since 2011. While the price decline would signal good news for consumers, it will also signal to the Fed that inflation is not threatening to rise anytime soon. With these two numbers - Retail Sales and PPI - in hand, tomorrow's Consumer Price Index (CPI) should prove very interesting.
The US dollar continues to run very strong, and that strength is not going to help US exports. This is yet another reason I believe the Fed will further delay any interest rate increases. With inflation not showing any signs of challenging the 2% mark, and with a strengthening dollar adding further pressure overseas, I just can't see the Fed changing their posture in the first half of 2015.
What all this means for the broader economy is hotly debated. There's a widespread belief that consumers are spending the money saved from the plummeting cost of a tank of gas, however I'm frankly not seeing any evidence of that. I've discussed that with people I encounter in various settings, and have yet to hear actual consumers confirm that they see this as a windfall available to spend at will. What I do hear is that people are using it to pay down bills, and occasionally I hear that they're saving it, but that's about it. They're not spending it to the point where it is noticeable in the numbers.
This makes sense when you stop to think about it. The dropping price of gas is most beneficial to folks that are living close to paycheck-to-paycheck. It makes sense that they are most likely to have credit card or loan debt that needs to be paid down, and they're taking advantage of that little extra to do just that. They're not going out and buying something extra. Folks with little-to-no debt don't really notice the difference other than to mention by the water cooler that they just spent less to fill up their tank. This group was already spending what and when they wanted, so the extra few bucks isn't making a difference in their habits.
What is definitely making a difference is the lack of compensation in the form of merit increases on the job, and the erosion of corporate benefits. The price of health care increased dramatically for the average worker again this year, and - based on current surveys - merit increases are barely keeping pace with inflation. The drop in the price of gas is merely keeping the average worker's overall income on par with last year's, given increased benefits costs.
With each passing week, I'm increasingly bearish on the prospects for 2015. There's now bipartisan talk in Congress about a federal gas tax increase to replace lost revenue from the declining price of gas. Unfortunately, that will only exacerbate the impact when oil and gas prices inevitably resume their normal upward trend. Europe's continued weakness, coupled with a lackluster growth forecast (compared to prior years) for China and India have me concerned about global drag on the US economy. Draghi's inability to send clear and consistent signals about the ECB's plans aren't helping.
For now, I'm taking a neutral to bearish posture in my trading, and I'm paying very close attention to the forward guidance in various sectors, trying to determine where there may be trade-able strength. Or trade-able weakness, for that matter. There's nothing wrong with going short in a down-turning market. Let's see what tomorrow's CPI report signals. I'll be very surprised if it doesn't confirm the other reports from this week.
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